Sunday, August 28, 2005

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Net loss stripping away questionable revenue items

2.Main revenue source -- licensing --- expected to decline further

3.Question mark over its decision to list in less biotech-savvy Singapore market

4.Resignation of CFO and independent director

There are quite a few points about this stock that disturb me, and I thought this might be the right time to write about them, after looking through its latest post-IPO results.

Looking at its revenue sources, it appears that licensing revenue, its chief source of revenue, has more than halved from US$25M in 1Q04 to US$9M in 1Q05. In fact, it was in a net loss position of about US$8M if one takes away the non-cash credit figure of US$9M, which was classified under "Amortisation of deferred revenue". I looked through the whole financial statement and there was only a small statement under the Cash Flow section of the Management Review, saying it was for deferred revenue, presumably a billing in of expected future revenue; a strange practice. Of course, it conveniently put the 1Q05 results into blue ink territory.

Maagement themselves indicated that licensing revenue was likely to trend downwards and that future growth was going to be driven by sales of their drug-eluting stents, which was apparently one of the most exciting developments in interventional cardiology. They had recently obtained the CE mark which allowed them to commercialise and sell their Axxion stent system in Europe and Asia, which had got the market all excited and pushed the stock price from below 70 cents to a high of about $1.20. So, perhaps the substantially lower licensing revenue was not important.

Of course, some might also point out that biotech stocks should not be treated conventionally like ordinary companies; they often incur losses up front but once their technology is well-accepted and go mainstream they could easily become multiple-baggers. I thought there was a possibility that might be the explanation for its high valuation (its potential for being a multi-bagger) and that I might not understand the technology well enough to judge, but then it struck me that if I was not familiar with biotech stock valuation then so probably were many other Singapore investors. So, why did Biosensors choose to list in Singapore's market?? Why didn't it choose to list in the US or Europe, where the investment community would be more knowledgeable about and receptive to biotech stocks and give such stocks higher valuations? Indeed, Biotech was unable to secure its desired issue price of $1.00 during its SGX IPO in May 2005 and ultimately had to sell them at 70 cents. That is one big question mark about the strength of its proprietary technology, especially when drug-eluting stent technology is hardly the sole domain of Biosensors; its chief competitors are the far bigger US firms of Johnson & Johnson and Boston Scientific.

Something else bugs me: the resignation of its CFO and one of its independent directors within 3 months of its IPO. I wonder whether the CFO left because he was also unable to comprehend the meaning of "Amortisation of deferred revenue" (see above) hahaha.

I summarise my argument as below: the investor who buys into Biosensors now is basically buying into the idea that the coming commercial sales of its drug-eluting stents will be a huge success, given that licensing revenues are going to become less and less significant. Perhaps this investor might have privileged knowledge of Biosensor's technology that leads him to think that it is technically superior and hence has a good chance of taking market share? Otherwise, he might look to Biosensors' choosing to list in Singapore instead of the US, as well as recent management changes, as evidence to the contrary.

cheras, LMA looks like a company with more dependable revenue and cheaper valuation to me. Its line of products have been approved by the US FDA since the 1990s so its technology can't be that bad. However, you may also extend my doubts to LMA about these biotech companies choosing to list in SG instead of the US. I think seeking the answer to that question might be a starting point to any research that you do on the company.